State's $8.8 billion in short-term notes get high ratings

Treasurer Bill Lockyer plans to sell the debt next week. The ratings could help draw interest from money market mutual funds and other institutional investors.

Two major credit-rating firms gave California high ratings Monday on $8.8 billion of short-term notes that Treasurer Bill Lockyer plans to sell next week.

Moody's Investors Service graded the debt MIG 1, the firm's highest rating. Standard & Poor's gave the notes a rating of SP-1, just below its top grade of SP-1-plus.

The ratings could help draw orders for the notes from money market mutual funds and other institutional investors that may buy only high-quality, short-term debt.

Lockyer already was counting on heavy demand for the debt from individual investors looking for a place to stash their cash for the next eight to nine months. The ratings from Moody's and S&P could lower the interest rate the state will pay on the securities, known as revenue anticipation notes, or RANs.

Municipal bond analysts have been forecasting that the annualized tax-free yield on the RANs, which will mature by June 30, would be 1% to 3%, depending on investor demand.

The interest is exempt from state and federal income tax for California investors, so even at 1% the return would far exceed what investors can earn on other short-term securities.

One-year U.S. Treasury bills, for example, pay just 0.36%, although they're a higher-quality security than a California note.

The state usually borrows via RANs in late summer or fall to bridge the gap between its current spending needs and the receipt of tax revenue later in the fiscal year, which ends June 30.

Although California has the lowest credit rating of the 50 states on its long-term bonds, Moody's said the top rating on the RANs was warranted because the firm expected the state to have "enough available cash and borrowables to repay the notes" by June 30.

S&P said "the state's capacity to repay its notes is strong," but cited "certain risks," including the political environment in California.

The state will sell the notes Sept. 21 to 23 via brokerages. Individual investors will be allowed to place orders Sept. 21 and 22.

More information is available at Lockyer's website, buycaliforniabonds.com.